Pharma Bear Raids: Dendreon And Pozen

Mark Twain once said: "October. This is one of the peculiarly dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August, and September." (Pudd'nhead Wilson's Calendar For 1894, October entry) T.S. Eliot was even more specific: "April is the cruelest month." They both must have been taking about pharmaceutical companies in general and Dendreon (DNDN) and Pozen (POZN) in particular. More on these companies in a minute.

One thing's sure: you need a cast iron stomach to invest in the pharmaceutical industry. Given the vicissitudes of and corruption on Wall Street; internecine warfare within the Food and Drug Administration (e.g., between CDER and CBER), the perverse nature of, well, Nature when it comes to running drug trials on some of the most formidable opponents known to Man; and an SEC still reeling from the Madoff scandal and the financial collapse of 2008, it's no wonder the landscape of corporate America is littered with the corpses of bankrupt companies that once upon a time had set their sights on finding a cure for cancer and other diseases.

Indeed, it's always been less risky to bet on a drug trial's failure than on its success. Great fortunes have been made and lost in this way, almost always by betting on the short side, naked or otherwise. (And I'm not talking about the state of dress of the market participants!)

Not that Wall Street hasn't been above helping some companies into their graves. It doesn't take a genius to know more drugs fail in trials than succeed. But there always have been a few on the Street -- and they seem to have grown in number over the last few years -- who are sufficiently impatient as to want to speed a company's demise when the opportunity presents itself, legal or otherwise. One way these miscreants did this was through the use of PIPE investments, some of which, as used by hedge funds in the past, violated U.S. government security laws. Here, the problem largely centered on hedge funds that used PIPE securities to cover shares that the funds had previously shorted in anticipation of the PIPE offering.

Another technique used exploited the market maker's exemption that led, for example, to excessive naked short selling and large numbers of fails-to-deliver positions. The issue was addressed by the SEC, to some extent, but the practice still has not been entirely eliminated and abuses continue.

There are many examples of companies whose stock has been the subject of naked short selling. Some were driven out of business. Even if that didn't happen, naked short selling made corporate life difficult. With their stock prices driven in the ground, companies found it difficult if not impossible to enter the capital markets for the purpose of raising money. In the case of biotechs, this meant less money for research and development, or even the cancellation of FDA trials.

Ask anyone to name a biotechnology company that has suffered as a result of FDA corruption and Wall Street malfeasance and they no doubt will name Dendreon Corporation . Based in Seattle, WA, the company is best known for its immunotherapeutic treatment Provenge for asymptomatic or minimally symptomatic metastatic castrate resistant (hormone refractory) prostate cancer (here and here). Approved after ten years of development and an expenditure of $1 billion, the treatment represents an entirely new way of treating cancer by harnessing the body's own immune system.

One line in the movie "Moneyball" says it best: "First one through the wall gets bloody." Indeed, Dendreon got bloodied. It was constantly under pressure from a number of Wall Street analysts. As well, it was the focus of heavy naked short selling. For example, SEC data show that on March 16, 2007, just a little short of two weeks before the critical Provenge FDA Advisory Committee meeting of March 29, 2007, over 1 million Dendreon shares failed to deliver. That's right … short sellers took Main Street's money and delivered … nothing!

This wasn't new. The number of Dendreon shares that had failed to deliver around that time numbered in the tens of millions. In fact, DNDN was listed daily on the SEC's so-called Regulation SHOlist. Not that the SEC was doing anything about it, mind you.

Because of naked short selling, the price of Dendreon was being driven well into the single digits … so far down, in fact, that the company was forced to stop work on Neuvenge for breast cancer. More to the point, it was forced to husband what little financial resources it had, together with the funds obtained through a private placement, to complete work on its pivotal Phase III trials for Provenge. (One can only wonder how many women's lives have been lost that might otherwise have been saved because of Wall Street's manipulation of Dendreon's stock in those days and the forced shutdown of the company's revolutionary work on Neuvenge!)

But the worst was yet to come. At an advisory committee, or AC, meeting called to review Provenge on March 29, 2007, seventeen members, mostly immunologists, voted 17-0 that Provenge was SAFE and 13-4 voted that the treatment demonstrated SUBSTANTIAL EFFICACY. This, indeed, represented a strong endorsement for FDA approval. Arguably, the data Dendreon presented did not meet the statistical purity demanded by some within the FDA. But given the nature of the disease-asymptomatic or minimally symptomatic metastatic castrate resistant (hormone refractory) prostate cancer … end stage prostate cancer -- the limited options available to the sufferers, and the strong AC recommendation, Wall Street expected Provenge to be approved. Dendreon's stock shot into the low $20-range.

Then, strange things started to happen. In early April, 2007, two members of the AC, Dr. Howard I. Scher and Dr. Maha Hussain, both of whom served under waivers because of their conflicts of interest, wrote letters to the FDA, disparaging Provenge and calling for its non-approval. Such actions were unprecedented. These two were joined by a third writer, Thomas Fleming, PhD, a statistician. (Here is Dr. Scher's letter, for example; Hussain's and Fleming's are similar.) All three were consultants to CDER's ODAC, directed at that time by Dr. Richard Pazdur. Even more egregious was the fact that all three letters were leaked to and published by The Cancer Letter of Rockville, MD, either shortly before or just after they were delivered to the FDA. (It is interesting to note, in passing, the similarity between the leaks in the case of Dendreon and the leaks of the Refusal-to-File letter to The Cancer Letter in the case of ImClone…a leak that was traced to CDER/ODAC.) Talk about your basic negative PR campaign. Interested readers are referred to the CareToLive Web site for full details. (Note: CareToLive still awaits the receipt of information in this matter the organization requested 2 years ago under the Freedom of Information Act, or FOIA. Additional background on the scandal can be found here.)

There's more to the story, of course … much more. On May 9, 2007, the FDA turned down Dendreon's application for approval of Provenge. The day still is known as Black Wednesday, so named by Dr. Mark Thornton, a former medical officer in the FDA Office of Oncology Products. Dendreon's stock plummeted into the single digits. But amazingly (or not so amazingly), some players on Wall Street thrived! In fact, they made off like bandits! Among them were seven hedge funds out of a universe of thousands that had placed counterintuitive trades -- that is, they were betting against approval -- using Dendreon listed put options. Mark Mitchell did a great job in unearthing these funds, and you can read about them here (Chapter 3) and here. For example, if you look at the Form 13F Information Table for Bernie Madoff's hedge fund filed with the SEC for the period ending March 31, 2007, you'll find the following entry:

DENDREON CORP COMMON 24823Q107 905 70000 SH CALL SOLE SOLE

DENDREON CORP COMMON 24823Q107 2327 180000 SH PUT SOLE SOLE

Imagine that. Bernie Madoff making real trades.

Talk about low-hanging fruit. Yet, the trials and tribulations of Dendreon and Provenge in 2007 never gained traction in the press. One has to wonder whether or not "investigative journalism" is simply dead or just another oxymoron, the literary equivalent to "jumbo shrimp" or "acute apathy" … which is what the mainstream ("mainscream") media seems to have displayed towards the Dendreon story in general. Pulitzer, anyone?

In any event, three weeks after the FDA turned down Provenge, a biotech company called Novacea and Schering-Plough signed a co-development agreement for a drug called Asentar that potentially was worth up to $440M to Novacea. Importantly, Asentar was Novacea's drug for … (wait for it) … prostate cancer. Digging a little deeper, we find that none other than Dr. Howard I. Scher was the co-lead on the pivotal Phase III trial for Asentar at the time of the Provenge AC. In fact, in a quirk of irony, Dr. Scher signed his FDA waiver to participate in the Provenge Advisory Committee meeting on the very same day -- February 26, 2007 -- that he was participating in a satellite symposium titled, "Improving Upon Current Standards: The Integration of Novel Therapies in the Treatment of Androgen-Independent Prostate Cancer," sponsored by Novacea.

The fact is, if Provenge had been approved, there's a very good chance it would have become the new standard of care in prostate cancer … a phrase Dr. Scher used in his letter to the FDA when he pleaded with the agency to turn down Dendreon's application for the approval of Provenge. Why do that? I think his use of this phrase was a thinly-veiled reference to how the approval of Provenge would shake up the status quo in terms of the adjuvant Taxotere trials Scher was conducting at the time … causing a significant loss of funding, time, and prestige. Might this explain why Dr. Scher wrote his letter? (By the way, the Asentar trial was halted because of the higher death rate in the treatment arm. Schering-Plough, of course, terminated its co-development deal with Novacea.)

Despite the setbacks experienced in 2007, the officers and scientists at Dendreon persisted in their goal of bringing the first immunological treatment for cancer to market. Yet, on April 28, 2009, just as then-President and CEO Dr. Mitch Gold was preparing to tell the world that the corporation had succeeded in assembling the data required to secure the approval of Provenge at a conference call specifically scheduled for this purpose, still another strange thing happened. Shortly before noon, someone named "monthaphumchareon" posted the following announcement on Yahoo!'s DNDN message board:

Shortly thereafter, around 1:15 ET, Dendreon's stock dropped. I don't mean it dropped just a few a points a la the 9% drop in Apple (OTC:APPL) stock some weeks ago on a 100-share trade that sent everybody and his brother running around with their hair on fire. I'm talking about a whopping 69% drop from $24.50 to $7.50 in … get ready for this ... 75 seconds!

You can see the carnage below, courtesy StockChart.com. To top it off, FINRA and the SEC looked, yawned, and let all trades stand.

(Click to enlarge)

Sen. Chuck Grassley (R-IA) wasn't buying the SEC's inaction. In particular, he wanted answers … answers as to why the SEC's Enforcement Division had not opened an investigation into the matter of the Dendreon bear raid, especially given the fact it had received complaints from investors.

So, on August 6, 2009, he sent a letter to the SEC's Office of the Inspector General, demanding an investigation. The result was Report OIG-521. The report, signed by then-IG H. David Kotz, had the entire last page of text redacted with reference to '(B)(7)(A).(7)(C).' For the uninitiated:

Further, we are withholding certain information within OIG-521 pursuant to 5 U.S.C. §552(7), 17 CFR §200.80(7)(i). This exemption protects from disclosure information compiled for law enforcement purposes, the release of which could reasonably be expected to interfere with enforcement activities. Because the underlying circumstances may change, we may later disclose some of this information. If you wish, you may make another request six months from the date of this letter.

Now, whether or not the "enforcement activities" to which Report OIG-521 referred are civil in nature, conducted through the SEC, or criminal, conducted through the DOJ/FBI, or both, is unknown. Yet, here we are, almost three years to the day following the great Dendreon bear raid, and not one word has been forthcoming from the U.S. government as to who was behind the raid or how they manipulated the markets so effectively. For example, were any of the hedge funds named by Mark Mitchell involved (albeit that Mr. Madoff, by that time, was a guest of the U.S. government's prison system). What about the brokerage houses and their analysts that had been so negative on Dendreon in the period leading up to the announcement on April 28, 2009 and thereafter? Or about those who were attempting to naked short Dendreon's stock into the ground? Inquiring minds would like answers.

Lest you think the bear raid on Dendreon's stock was a singular event in the pharma space, consider what befell Pozen (NASDAQ:POZN) on April 30, 2010. This time "Paul Revere" was none other than someone named "guyrogers3456," posting on the Yahoo!'s POZN message board.

The result? Here's the chart, again courtesy StockChart.com.

The Pozen bear raid was not quite in the same class as the Dendreon bear raid -- this one took Pozen's stock down from roughly $12.50 to$5.50, for a 56% haircut -- but it didn't make those who lost money feel any better. Of course, all trades were allowed to stand. As far as I can determine, as well, there never has been any explanation provided by the SEC for this "event" either.

All of which leads me to wonder: how many more such bear raids have occurred in the last 3 or more years? Even more to the point, what's going on here? Has someone figured out how to exploit holes in the U.S. stock trading systems? Are there strategic vulnerabilities in our market's structure that make it susceptible to these types of raids? Were these small bear raids trial runs before the Big One ... the 2010 Flash Crash? If they were, when can we expect the next big one?

I am skeptical we ever will learn the answers.

Technical Analyses

The Daily chart for DNDN, courtesy StockChart.com, is below. The stock jumped Tuesday following the Johnson & Johnson (JNJ) conference call in which the company's vice president for Investor Relations said in response to a question that the corporation did not believe it was going to see the continuing trend on the overall survival in the Phase III trial results for Zytiga. This, of course, jeopardizes approval of Zytiga in Provenge's (pre-chemo) space. The stock retreated some on Wednesday, to close at $8.98. The Relative Strength on the Daily Chart is low, and the MACD is neutral.

From the Weekly chart, we see much the same story … a low Relative Strength and neutral MACD. Barring any bad news or a major decline in the market, it is possible the stock is touching support as defined by a line drawn between the lows experienced in October and late December, 2011.

With regard to the Daily chart for POZN, the stock has been in a strong uptrend since early March, and has been overbought for more than 4 weeks. The MACD is positive.

The Weekly chart tells a similar story. Here, the stock has broken through the 200-week moving average (red line) and now is in overbought territory. The price appears to be rising towards the $12.50 level it reached 2 years ago … when the bear raid occurred. The MACD is positive.

Disclosure: I am long DNDN and will not alter my position within 72 hours of the time of publication of this article. I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. It is up to investors to make the correct decision after necessary research. Investing includes risks, including loss of principal.

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